by T. GormanPosted on Posted in SECActions

Another high profile insider trading trial began in New York City this week. Rajat Gupta, former Goldman Sachs director, has been charged with insider trading in a case that promises to be quite different from other recent high profile trials. This time prosecutors will have to prove their case the old fashioned way using bits and pieces of circumstantial evidence rather than the defendant’s own words caught on wire tap tapes.

At the same time in other New York courtrooms another insider trading case unfolded, although with much less fanfare than that of Mr. Gupta. This one involved Reema Shah and Robert Kwok. Ms. Shah was a portfolio manager at RiverSource Investments, LLC, a registered investment advisor which is a subsidiary of Ameriprise Financial, Inc. Mr. Kwok was a Senior Director of Business Management at Yahoo! Inc.

Ms. Shah and Mr. Kwok met at a California conference center in January 2008 where they were attending separate meetings. Subsequently, the two kept in touch. Mr. Kwok provided Ms. Shaw with information about his company, including if its financial performance would meet market estimates. Ms. Shah provided Mr. Kwok with information from her work as a portfolio manager which aided him in his personal investments.

In early 2008 Ms. Shaw told Mr. Kwok that Autodesk Inc. intended to acquire Moldflow Corporation. She obtained this information from an inside source at Autodesk. Based on the information Mr. Kwok purchased 1,500 shares of Moldflow stock in April 2008. Following the deal announcement he sold it, realizing a profit of $4,754.

Subsequently, in July 2009 Ms. Shaw asked her friend about certain rumors which had been on-going for a considerable period of time regarding his company. Specifically, she wanted to know if a long rumored deal between Microsoft Corporation and Yahoo concerning a potential internet search engine alliance would be forthcoming. Mr. Kwok confirmed the deal would be announced shortly and that Yahoo had carefully guarded the information. Ms. Kwok caused the funds she helped manage to buy 700,300 shares of Yahoo on July 16, 2009. The shares were sold by the end of the month at a profit of $389,000.

Each was named in a criminal information and pleaded guilty. Ms. Shah pleaded guilty to one count of conspiracy to commit securities fraud and one count of securities fraud. Mr. Kwok pleaded guilty to one count of conspiracy. Both are awaiting sentencing.

Ms. Shah and Mr. Kwok were also named as defendants in an SEC complaint alleging violations of Exchange Act Section 10(b). Each settled, consenting to the entry of a permanent injunction, acknowledging the same facts they admitted in their respective criminal cases. Ms. Shaw agreed to be barred from the securities industry. Mr. Kwok agreed to be barred from serving as an officer or director of a public company. Financial remedies will be considered at a later date. SEC v. Shah (S.D.N.Y. Filed May 21, 2012).

ABA Program: The New Era of FCPA Enforcement and the Collapse of the Africa Sting Cases: Time to Reevaluate? Tuesday June 5, 2012, 12:00 PM to 1:30 PM EST, Live in Washington, DC and webcast.

Moderators: Thomas O. Gorman, Partner, Dorsey & Whitney LLP, Washington, D.C. and Frank C. Razzano, Partner, Pepper Hamilton, LLP, Washington, D.C.

Panel: John D. Buretta, Deputy Asst. AG, Criminal Division, DOJ, Washington, D.C.; Charles E. Cain, Deputy Chief FCPA Unit, SEC, Washington, D.C.; France Chain, Senior Legal Analyst, Anti-Corruption Division, OECD, Paris, France; Prof. Mike Koehler, Butler University, Indianapolis, Ind.; Hon. Stanley Sporkin, Washington, D.C.; Greg D. Andres, Partner, Davis Polk, New York, New York; Eric Bruce, Partner, Kobre & Kim, New York, New York. Live Presentation from Washington, DC.

Co-hosted by Dorsey & Whitney LLP and Pepper Hamilton, LP at Penthouse at Hamilton Square, 600 Fourteenth St., N.W. Washington, D.C. Click here for more information (here)

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by T. GormanPosted on Posted in SECActions

The SEC’s long established settlement practice of resolving enforcement actions without requiring an admission of liability – that is, on a neither admit nor deny basis – came under scrutiny again last week. On May 17, 2012 a House Committee held hearings on the question. Earlier in the week the Commission and Citigroup filed briefs in the Second Circuit Court of Appeals in SEC v. Citigroup, the enforcement action in which District Court Judge Jed Rakoff rejected the proposed settlement while citing the practice. The Second Circuit filings presented the unusual specter of the agency and the defendant in a major enforcement action combining forces.

In defense of its position in each venue, the SEC correctly points out that the “neither admit nor deny” policy is one of long standing. Since the early days of its enforcement program the agency has utilized this policy, although it has been bolstered and tweaked. A requirement was added which precludes a settling defendant from publically repudiating the facts in the SEC complaint. Recently, the Enforcement Division, with the approval of the Commission, began requiring that parties who have admitted the underlying facts in another proceeding or been convicted acknowledge those admissions in the settlement papers with the Commission, Nevertheless, the policy has remained constant.

In testimony before the House, and in the Second Circuit, the agency also correctly pointed out that its policy is consistent with that of many other federal and state law enforcement agencies and encourages settlement. In fact the policy as applied by the SEC is more stringent than that of many other agencies which do not preclude a settling defendant from denying the underlying facts. The policy also fosters settlement by avoiding needless litigation by defendants seeking to avoid the potential liability that would arise from related private actions if they were required to make admissions in a settlement with the SEC.

Despite the validity of these points, they fail to deal with the underlying issue in Citigroup, a question also involved Bank of America. In both cases the Court raised significant issues about the proposed settlements, questioning the “neither admit nor deny” policy, the adequacy of the settlement terms and the facts presented to the Court. In both cases the Court stated it had insufficient facts from which to evaluate the proposed settlement. In Bank of America the Court repeatedly questions the propriety of not naming individuals as defendants. In Citigroup the Judge stated that the factual allegations in the complaint depicted an intentional fraud, yet the charges were negligence.

If the “neither admit nor deny” policy was the key issue, the Court would not have signed off in the Bank of America settlement. It did, but only after receiving additional factual material from the SEC and the NY AG who filed a similar action. After reviewing that evidence, and a revision of the remedies by the parties, the Court entered the settlement on a “neither admit nor deny” basis. This is fully consistent with Judge Rakoff’s determinations in other SEC cases as the agency has noted.

In Citigroup the Court did not enter the settlement. It was not furnished with any additional evidentiary materials and the parties did not offer to modify the proposed remedies. While the parties answered a series of questions, the Court continued to claim it had insufficient facts to evaluate the settlement. Thus, unlike Bank of America, where the key question about the complaint was answered, in Citigroup it was not – the apparent mismatch between the facts and the charges remains unexplained.

The resolution of this seeming mismatch is of critical importance. Commission enforcement actions serve not just to address the specific violations in the case but also to give notice about the views of the agency on important questions of law and policy. Each case makes a statement and is part of a larger overall national enforcement program.

When the documents prepared by the Commission contain what appears to be a fundamental inconsistency, it muddles the enforcement message. In Citigroup that message has been lost through the inconsistency as well as in the dialogue about the Commission’s policy. Regardless of the outcome of the Congressional hearings and the Citigroup appeal, if the Commission is going to have an effective enforcement program it must deliver a clear message.

ABA Program: The New Era of FCPA Enforcement and the Collapse of the Africa Sting Cases: Time to Reevaluate? Tuesday June 5, 2012, 12:00 PM to 1:30 PM EST, Live in Washington, DC and webcast.

Moderators: Thomas O. Gorman, Partner, Dorsey & Whitney LLP, Washington, D.C. and Frank C. Razzano, Partner, Pepper Hamilton, LLP, Washington, D.C.

Panel: John D. Buretta, Deputy Asst. AG, Criminal Division, DOJ, Washington, D.C.; Charles E. Cain, Deputy Chief FCPA Unit, SEC, Washington, D.C.; France Chain, Senior Legal Analyst, Anti-Corruption Division, OECD, Paris, France; Prof. Mike Koehler, Butler University, Indianapolis, Ind.; Hon. Stanley Sporkin, Washington, D.C.; Greg D. Andres, Partner, Davis Polk, New York, New York; Eric Bruce, Partner, Kobre & Kim, New York, New York. Live Presentation from Washington, DC.

Co-hosted by Dorsey & Whitney LLP and Pepper Hamilton, LP at Penthouse at Hamilton Square, 600 Fourteenth St., N.W. Washington, D.C. Click here for more information (here)

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